Labor: An ERISA plan for litigation

At the center of Employee Retirement Income Security Act (ERISA) benefit claim litigation is the ERISA plan. In the plan, employers have flexibility to define the obligations required of plan participants before an employer must pay benefits. Careful drafting of an ERISA plan can provide an employer a greater likelihood of success in benefit claim litigation. Part one of this three-part series on preparing an ERISA plan for litigation addresses the exhaustion of administrative remedies, gaining the benefit of discretionary decision-making and setting the litigation forum.

Setting the process: Administrative review and exhaustion

When preparing an ERISA plan for litigation, employers should require that the plan’s administrative procedures be exhausted as a condition for a participant to file a lawsuit. ERISA requires that a plan include a process for participants to follow when asserting a claim for benefits. The plan must also provide a process for notification to participants of benefit determinations and for appeal of adverse benefit determinations. Often the process will include time limits for the submission of information to the plan and multiple levels of administrative appeal. ERISA does not expressly require exhaustion of administrative remedies by participants, but courts routinely enforce exhaustion requirements.

Administrative exhaustion provides employers with the best opportunity to make correct benefit determinations, because the exhaustion requirement gives plan administrators the ability to collect facts, interpret plan language, reconsider benefit denials, correct erroneous decisions and narrow the disputed issues by explaining the rationale behind a benefit determination. Exhaustion also streamlines the litigation process because it allows the plan to gather the administrative record to be considered by the court.

The exhaustion requirement should clearly and unambiguously apply to:

1. The recovery of benefits under the plan

2. The enforcement of rights under the plan

3. The clarification of future benefits under the plan

Setting the bar: Deferential review of plan interpretations

An ERISA plan for litigation will grant the plan administrator broad discretionary decision-making authority to interpret plan language and make factual determinations. Federal courts adjudicating ERISA benefit claims sit in appeal of the decisions made by the plan administrator. The standard of review the court applies is contingent on the plan language. If the plan grants the administrator discretionary authority, the court will not overturn the administrator’s determination unless the determination was “arbitrary and capricious,” which is not a demanding form of judicial review. On the other hand, in the absence of plan language granting discretionary review to the plan administrator, the court is allowed to review the decision “de novo,” meaning the court may substitute its own interpretations for that of the plan administrator.

The combination of a requirement that a participant exhaust the plan’s administrative remedies and a grant of discretionary decision-making to the plan administrator results in a benefit determination more likely to withstand judicial scrutiny. Under these circumstances, the participant will typically not be permitted to introduce information to the court that was not previously considered by the plan administrator, because the court will be limited to determining whether or not the plan abused its discretion when making the benefit determination rather than collecting new evidence for the court’s own consideration.

Setting the location: Forum selection clauses

An ERISA plan for litigation will contain a forum selection clause—a clause that presets the venue in which litigation must be brought. ERISA allows a participant to initiate a lawsuit alleging an improper denial of benefits in one of three places: where the plan is administered, where the ERISA breach took place or where the defendant resides or may be found. This broad venue option allows ERISA plaintiffs to select a forum in which their claim has a higher probability of success. Federal courts, however, have routinely enforced clauses dictating the location that litigation must be initiated, and no fewer than 16 courts have enforced forum selection clauses in ERISA plans.

A clause limiting venue is often presumed valid, and a participant has the burden to convince the court that:

1. The clause was obtained by fraud, duress, undue influence or unconscionably

2. The forum is so inappropriate that an injustice will occur depriving the participant of its day in court

3. Enforcement of the clause would contravene the existing public policy of the forum in which the litigation was initiated

When enforcing forum selection clauses, most courts have noted that a participant is rarely going to be inconvenienced by the requirement to bring litigation in a distant forum because the majority of ERISA benefit matters are decided on the administrative record, without evidentiary hearings, and solely through briefing by the litigants. Importantly, employers should provide notice to plan participants of any restrictions on the forum in which a lawsuit may be brought.

Having an ERISA plan ready for litigation can make benefit claim litigation more orderly and predictable. Part two of this series will discuss statutes of limitations and accrual of causes of action.